China: the leeway for supporting domestic demand is shrinking

Having tightened credit conditions in 2017 and attempted to curb the development of the shadow banking industry over the past year, the Chinese authorities have been cautiously loosening their policies. Their aim has been to stabilise the economy in order to avoid the social tensions which would inevitably arise if unemployment increases. Their strategy has been to proceed in gradual steps, across all available fronts, including increasing infrastructure spending, promoting corporate credit for smaller companies and loans to the sectors considered a priority under the 2025 plan.

In particular, this strategy involves supporting consumer spending via tax cuts, reducing VAT rates and subsidising automobile purchases in rural areas. The authorities’ task is far from easy, however. Urban household equipment rates are now particularly high, or even close to saturation. Given the current level of development, the rate of automobile purchases should increase more slowly (chart 1). The growth in consumer spending is now underpinned by income from rural households, which still have equipment rates far below their urban counterparts, or by the increasing development of services on offer to encourage urban households to consume more (chart 2).

Ultimately, although the measures implemented by the authorities should cause the growth rate to tick back up slightly, to around 6 - 6.5%, their leeway for supporting domestic demand is shrinking.